Moody's: Currency Shifts To Widen Gap Between Global Economies

- Robust US growth and stabilising financing conditions is seen to help the global economy to grow more strongly next year after muted growth in 2015, while South Africa and Turkey will stay vulnerable to the strong US dollar, according to the quarterly Global Macro Outlook report released by Moody's on Tuesday.

Moody's expects G20 GDP growth of 2.8 percent in 2015, broadly unchanged from last year, before rising to around 3.0 percent in 2016.

"While prospects of robust growth point to a gradual tightening of monetary policy and higher yields in the US, economic prospects are subdued in many other regions" said Marie Diron, a Moody's Senior Vice President and author of the report. "The outcome is likely to be increased divergence between those economies that have built up resilience, like the US and India, and those that are vulnerable to negative shocks, like Brazil, South Africa and Turkey."

The anticipated tightening of US monetary policy would come at a time when most other central banks were easing policy or maintaining their loose stance, as the unusual divergence reflected different prospects for growth and inflation around the world.

"This gap will fuel shifts in capital flows and currency values and affect the global economic outlook" said in the report, while countries such as Turkey and South Africa were more vulnerable to the strong US dollar and the changes in capital flows that it reflected.

"The weaker euro and lower oil prices is forecast to give a boost to the euro area economy, with GDP growth of 1.5 percent in both 2015 and 2016, up from Moody's previous estimate in the last outlook" it added, as lower oil prices and the weaker euro would boost growth in the short term.

"However, there is uncertainty over Greece's negotiations with its international creditors and its future membership of the euro area" it said, while a Greek exit, which was not Moody's baseline scenario, would be very negative for the Greek economy.

Since the debt crisis of 2012, the European Central Bank had strengthened its ability to respond to a financial shock, while euro area countries have had reduced their trade and financial links with Greece, reducing the potential impact of a Greek exit on other euro member states, it said.